The week starts in the red for the European majors with both the Euro and the Pound pushing lower ahead of a day of thin liquidity with the US markets partially closed for a holiday. Both currencies are responding to fresh news related to their domestic risks: Italy's budget proposal and the Brexit negotiations. The Dollar scores fresh gains across the board on the back of Fed's continued hawkishness. Gold threatens a return to the $1,200 area while Oil ticks higher on news from Saudi Arabia.
The Euro is in close proximity to the key 1.13 level this morning as trading kicks off on a bearish note. Italy is expected to submit a revised budget draft to the EU, one that would take into consideration the bloc's limits on budget deficit, but the government coalition doesn't seem willing to play ball. Deputy PMs Salvini and Di Maio have voiced their discontent over the EU's response signaling that their priorities lie with the Italian people and their needs. An upcoming confrontation between them and the EU leaders doesn't bode well for the Euro and with liquidity being on the thin side today a break below 1.13 may be imminent, potentially opening the door for a decline to 1.08.
The Pound trades with a similar bias this morning losing ground and retreating below 1.29. Hopes for a Brexit deal have been diminishing since the start of the month as the focus has shifted from Brussels to the UK Parliament. Recent news may have suggested that the two sides have almost reached an agreement but the really difficult part for Theresa May will be selling this deal to her Parliament. After another ministerial resignation on Friday, the Sunday Times now reports that more members of May's cabinet are ready to leave and traders are selling the Pound worried about a catastrophic defeat in the Parliament. As trading volume will be thinner today, due to the US holiday, Sterling may see itself correcting all the way to the 1.27 support.
The Dollar rallies on the back of Fed's continued hawkishness, as seen in the FOMC statement last week, and risk-off flows from the Euro and the Pound. At the same time though, the greenback is enjoying fresh demand of its own as the Fed made clear that another rate hike is to be expected next month and the case for a continuation in 2019 is still the main scenario. This week's US inflation report, due for Wednesday, will be a key piece of data and if the figures print considerably higher than last month, as expected, the Dollar will rally further as the Fed will be compelled to keep raising rates to rein in inflation. Dollar/Yen is trading around 114 this morning with the 114.50 area as the immediate target but a further extension higher may see prices hitting 115.
Gold suffered a very bearish day on Friday collapsing below $1,210 as the Dollar was scoring gains all over the place. Technically, this retreat negates the bullish run we've seen since early October; unless Gold immediately moves back above the $1,215 level - which doesn't seem likely - then this swing lower opens the door for a deeper correction. The next level to keep an eye on, especially if the Dollar continues to be in control is the $1,200 area. Oil entered the $59-60 support zone we've mentioned last week and bounces higher; at the same time, news that Saudi Arabia are considering to reduce their exports is helping prices recover. However, for a meaningful move higher we first need to overcome the $62 mark.
Equities had a rather bearish day on Friday but this morning the European and US futures are indicating a bullish opening bell. It will be interesting to see how global stocks will trade at the start of the week, especially in Europe. There's a significant amount of potential risks mounting, with Brexit and Italy's budget being the key ones, that don't justify this morning's positivity, but I guess we'll have to wait and see how the week progresses.
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All times are GMT +4.
Written by Konstantinos Anthis, Head of Research